Outer Banks Flood Insurance Update

June 5, 2013 By Ilona

Members of OBAR attended the National Association of Realtors Legislative Meetings in Raleigh recently and shared information about the potential detrimental impact of the Biggert-Waters Act, passed in July 2012 to reform the National Flood Insurance Program. Most legislators seemed to be unaware of this information. NAR’s Land Use and Property Rights Committee appointed a special Flood Insurance Study Committee to review the legislation further.

Below are talking points to share with local, state and national legislators when you have the opportunity:

BACKGROUND:Congress passed the Biggert-Waters Act (BW-12) on July 6, 2012. BW-12, a provision of H.R. 4348 – Surface Transportation Act, includes several amendments to the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973 intended to significantly improve the financial sustainability of the National Flood Insurance Program (NFIP). The NFIP is currently operating at a deficit due to large catastrophic losses incurred in 2005 and 2012. While BW-12 addresses specific program flaws that have been attributed to a large portion of total program losses, many BW-12 provisions will have a detrimental impact on home ownership, housing affordability, property market values and the overall sustainability of the program.Biggert-Waters 2012 should be amended to address the following:

Affordability of Coverage: The cost of property insurance (homeowners, wind and hail, flood, etc.) affects housing affordability, market values, financing and investment in communities. The NFIP is mandated to be widely available and affordable. Due to BW-12 changes to the rate, premium and coverage structure, flood insurance premiums could increase up to 1000% or more for some policyholders. This huge increase could force policyholders to sell their homes. It has the potential to force homeowners into foreclosure. Property values decline when the cost of insurance becomes so high thus impacting local tax revenues. Homeowners without a mortgage will not participate in the program due to the high cost of coverage, thereby negatively impacting market penetration and the long-term sustainability and affordability of the program. For policyholders without a mortgage, FEMA aid is seen as de facto flood insurance. There is no incentive to participate in the program when the cost is prohibitive.

Loss of Grandfathering: The grandfathering provision should remain. If a structure is built to the NFIP standards in place at time of construction, then a homeowner should not be penalized if map revisions cause a significant change to the zone or BFE of a structure. This will cause an increase in flood insurance premiums thus impacting mortgage payments. BW-12 will create situations where homeowners would not have originally qualified for their mortgage if the lender considered future flood insurance premiums increases. This reform measure is unfair and excessive considering other BW-12 reform measures that will have a greater impact in reducing future flood hazard risk and increasing premium revenues.

Rate Structure: BW-12 includes the provision that “catastrophic loss years” be included to calculate the average historical loss year. The NFIP was self-sustaining for over 30 years. In 2005, Hurricane Katrina caused extreme catastrophic losses. Including these “outlier” event losses to determine NFIP rates will cause artificially high increases in rates. BW-12 also increases the annual rate increase cap from 10% to 20%. This is an arbitrary and capricious allowance and has nothing to do with risk. The maximum limit of coverage is only $250,000 for residential policies and $500,000 for commercial structures. The issue of primary residence replacement cost coverage rates being equal to actual cash value coverage rates for second homes needs to be addressed.

Administrative Costs: While BW-12 includes reforms that put the burden of raising program revenues and reducing flood hazard risks on individual policyholders, it does not address the efficiency and overall administrative costs of the program. More than one-third of NFIP premiums are paid to Write-Your-Own (WYO) companies. FEMA does not know how much of what is paid to these companies is used to cover expenses or how much is actually profit. The cost to administer the program should be based on a per policy cost, not a commission percentage of premium. The passage of BW-12 creates a windfall for the 90 WYO companies that service NFIP policies.

A Flood Insurance Summit, sponsored by OBAR and attended by NAR and NCAR Senior Regulatory representatives, Congressional and State representatives, local elected officials and OBAR leadership was held in early May. The Summit proved to be an eye-opener for those attending. After an informational morning presentation, attendees toured the Outer Banks and got a better understanding of the diverse housing inventory and how the structures would be impacted by the new flood insurance reforms. A copy of the flood insurance presentation is posted on www.outerbanksrealtors.com under the Advocacy tab which can be found by clicking:http://outerbanksrealtors.com/cms/bm~doc/2013-may-1-obar-flood-summit-presentation—updated.pdf

Please keep in mind that the term “subsidized” refers to policies on structures built prior to the effective date of flood maps (approx… 1974) that receive substantial discounts on their premiums. Substantial discounts on flood insurance were offered to existing structures when flood maps became effective to encourage them to participate in the program.

FYI: NAR has posted a link to an article by an Associated Press reporter on the rising cost of homeowners insurance that was released this week. OBAR/OBHBA Government Affairs Consultant Willo Kelly is quoted in the article.